Every Canadian knows about the dreaded wind chill factor that makes already frigid temperatures feel even colder. On extreme wind chill factor days, it’s much more comfortable to stay inside where it’s warm – but with the demands life puts on us, that’s not always possible and we’re forced to face the chill.
The same is true of your investments. Inside your Registered Retirement Savings Plan (RRSP) your money is warm and comfortable – protected from tax chill and able to grow and multiply in a tax-deferred environment until you need those assets in retirement, when they will be taxed, potentially at a lower rate. That’s what makes an RRSP the most potent and important retirement income builder for most Canadians.
But your RRSP alone may not be able to deliver the level of financial comfort you’ll need in retirement. That’s because the government caps your total annual RRSP contribution and further limits your investment options by restricting the foreign property content inside your RRSP to, in most situations, just 30 per cent of the plan’s book value.
This means you’ll likely need to seek investments outside your RRSP that are free from the restrictions imposed on your registered plan. Unfortunately, all of those non-registered investments will be forced to face the dreaded tax chill factor. Fortunately, even though your non-registered investments won’t enjoy the same tax-deferral benefits as the investments in your RRSP, you can select investments that complement those in your registered plan while minimizing taxes and maximizing potential long-term after tax returns:
- Interest income earned on bonds, T-bills and Guaranteed Income Certificates is taxed at your marginal rate, while capital gains and dividends from Canadian corporations are taxed less heavily. You’ll also receive preferential tax treatment on income distributed by qualifying Canadian, as well as dividends earned by equity mutual funds that are flowed through to you as distributions.
- Most mutual funds trigger a tax consequence any time you switch from one non-registered fund to another, but tax advantaged mutual funds do not. This type of fund structure is treated as a single entity for tax purposes so you can move assets freely among share classes (to rebalance your portfolio, for example) while deferring taxation of any capital gains.
- Certain mutual funds are managed specifically to minimize annual distributions. With this type of investment, you may not have to report any investment income until your sell your investment – allowing you to time the sale for minimal tax exposure, such as by selling them in a year when you can take advantage of offsetting capital losses, or when you are in a lower tax bracket.
- If you have “maxed out” your RSP contributions, have your debt under control, and you want to shelter excess capital while maximizing the value of your estate, consider universal life insurance. There is a wide range of universal life investment options to choose from.
It would be ideal to keep all of your investments inside the warm confines of your tax-sheltered RRSP. But the prudent investor knows that advantageous opportunities for long-term growth can also be attained by venturing outside through a well-chosen portfolio of non-registered investments. A financial advisor can help you develop an investment strategy that is exactly right for your financial needs and keeps the tax chill factor to a bearable minimum.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice.
For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
In Toronto, contact Sally Brady
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